ENVIRONMENT AND PRODUCTION TECHNOLOGY DIVISION MAY 2006 EPT Discussion Paper 150 Impacts of Considering Climate Variability on Investment Decisions in Ethiopia Paul J. Block, Kenneth Strzepek, Mark Rosegrant, and Xinshen Diao 2033 K Street, NW, Washington, DC 20006-1002 USA • Tel.: +1-202-862-5600 • Fax: +1-202-467-4439 [email protected] www.ifpri.org IFPRI Division Discussion Papers contain preliminary material and research results. They have not been subject to formal external reviews managed by IFPRI's Publications Review Committee, but have been reviewed by at least one internal or external researcher. They are circulated in order to stimulate discussion and critical comment. Copyright 2005, International Food Policy Research Institute. All rights reserved. Sections of this material may be reproduced for personal and not-for profit use without the express written permission of but with acknowledgment to IFPRI. To reproduce the material contained herein for profit or commercial use requires express written permission. To obtain permission, contact the Communications Division at ifpri- [email protected]. ACKNOWLEDGMENTS The authors would like to thank Claudia Sadoff and David Grey of the World Bank for their insights and comments. i ABSTRACT Extreme interannual variability of precipitation within Ethiopia is not uncommon, inducing droughts or floods and often creating serious repercussions on agricultural and non- agricultural commodities. An agro-economic model, including mean climate variables, was developed to assess irrigation and road construction investment strategies in comparison to a baseline scenario over a 12-year time horizon. The motivation for this work is to evaluate whether the inclusion of climate variability in the model has a significant effect on prospective investment strategies and the resulting country-wide economy. The mean climate model is transformed into a variable climate model by dynamically adding yearly climate-yield factors, which influence agricultural production levels and linkages to non-agricultural goods. Nine sets of variable climate data are processed by the new model to produce an ensemble of potential economic prediction indicators. Analysis of gross domestic product and poverty rate reveal a significant overestimation of the country’s future welfare by the mean climate model method, in comparison to probability density functions created from the variable climate ensemble. The ensemble is further utilized to demonstrate risk assessment capabilities. The addition of climate variability to the agro-economic model provides a framework, including realistic ranges of economic values, from which Ethiopian planners may make strategic decisions. ii TABLE OF CONTENTS 1. Introduction 1 2. Background 2 3. Climatic Data 3 4. Model Framework 4 5. Methods for Climate Modifications in the Model 10 6. Results of Mean Climate (deterministic) Versus Variable Climate (stochastic) Modeling 20 7. Summary and Discussion 27 Appendix I: Equations in the Spatial, Multi-Market Model of Ethiopia Agriculture 31 References 36 iii Impacts of Considering Climate Variability on Investment Decisions in Ethiopia Paul J. Block,1 Kenneth Strzepek,1 and 2 Mark Rosegrant,3 and Xinshen Diao3 1. INTRODUCTION Although Ethiopia is rich in culture, history, and natural resources, it is often remembered more for its disastrous droughts and floods, starving population, and struggling economy. Its heavy reliance on agriculture, combined with its susceptibility to frequent climate extremes, has left it in a precarious position, striving to not only stay on par, but to prevent vast numbers of people from falling deeper into disparity. With 85 percent of the population living in rural areas, agriculture plays an important role in physical and economical survival. This work is part of an on-going study focusing on relevant and realistic potential investment strategies within Ethiopia. The hope is that these strategies may provide insights into how Ethiopia should best proceed in the years to come, both on regional and country levels, for rural and urban alike. Goals set forth by the Ethiopian government are included explicitly, including plans for development in agriculture, water resources, and roadway infrastructure. To assist in this activity, an agro-economic model was developed by the International Food Policy Research Institute (IFPRI) (Diao et al. 2005.) The model is designed to assess investment strategies and afford recommendations based on forecasts of economic indicators. 1 Dept of Civil and Environmental Engineering, University of Colorado at Boulder 428 UCB, Boulder, CO 80309- 0428. [email protected]. 2 Dept of Civil and Environmental Engineering, University of Colorado at Boulder 428 UCB, Boulder, CO 80309- 0428. [email protected] and International Food Policy Research Institute, 2033 K Street, NW, Washington, DC 20006-1002 3 Environment and Production Technology Division (m. [email protected]) and Development Strategy and Governance Division ([email protected]), International Food Policy Research Institute, 2033 K Street, NW, Washington, DC 20006-1002. 1 2 The climate in Ethiopia is generally associated with tropical monsoon-type behavior, experiencing significant June-September rainfall, yet measurably cooler due its high plateau and central mountain range elevations. It is the occurrence of climate extremes, though, both annual and seasonal, which can impact regional economic production, resulting in reduced or negative growth rates. Therefore, due to the importance of climate on the economy of Ethiopia, pertinent climatic variables are incorporated into the agro-economic model. The original version employs average climatic variables, held constant throughout the simulation projection periods. The motivation for this work is to assess whether the inclusion of climate variability in the model, both annually and seasonally, has a significant effect on prospective investment strategies and the resulting country-wide economy. If the effect is remarkable, the implications may be significant, and aid in providing guidance and direction to strategic planners, as well as protection of the investments through wise development decisions. This paper begins with a brief background on the contemporary move toward modeling with climate variability, followed by a description and validation of climate data employed in the agro-economic model. The original model framework is presented next, after which the methodology for modifying the climatic portion of the model is outlined. Subsequently, the effects of modeling with and without climate variability are compared and discussed, finishing with a summary and discussion. 2. BACKGROUND A growing number of articles on the influence of including climate variability in models and assessments are appearing in agricultural and economics literature. The general trend in modeling, especially considering the increased ease and decreased processing time, is to include 3 climate variability not only for more representative and descriptive results, but to allow for risk assessment as well (Taylor, et al. 1995; Letson, et al. 2001; Ludena, et al. 2003; Ferreyra, et al. 2001.) Numerous studies indicate that agriculture is particularly sensitive and vulnerable to climate variability, more so than almost any other activity (Dixon, et al. 1999.) Agriculture is often very productive in a multitude of geographic settings under the influence of mean climate variables, but is frequently susceptible to crop failure during extreme climate events (Salinger, et al. 1997.) Additional research has also shown that agriculture is especially vulnerable in developing countries during extreme or semi-extreme events due in large part to the limited infrastructure, and its inability to endure atypical climate fluctuations. Patt (1999), in a paper concerning the treatment of low probability events, claims that extreme climate events often dominate decision making. With this in mind, more climate-varying agriculture models are being built for comparison to mean climate models or even actual field data if available, and are showing that variability is of importance (Mendelsohn et al. 1999). 3. CLIMATIC DATA The climatic data utilized for inclusion in the agro-economic model is part of the CRU TS 2.0 dataset, obtained from the University of East Anglia, available at http://www.cru.uea.uk/~timm/grid/CRU_TS_2_0.html. It consists of grided data in 0.5-degree by 0.5-degree cells, containing 100 years of monthly data. Much of the data from 1901 – 1960 is synthetic data, and is obtained based on 1961 – 1990 averages and grided anomalies (Block and Rajagopalan 2006.) As a result of the sparse and spotty precipitation gauges in the region, the upper Blue Nile basin precipitation data from the CRU set (1961-2000) was validated to ensure its spatial and 4 temporal representation, by comparison with two other global precipitation datasets: University of Delaware (UDEL) and CPC merged analysis of precipitation (CMAP). The UDEL data, also in a 0.5-degree by 0.5-degree format, contains monthly data from 1950 – 1999, while the CMAP data, at a resolution of 2.5-degree by 2.5-degree, is available from 1979 – 2000. The CRU and UDEL data have strong spatial (R2 = 0.82) and temporal (R2 = 0.79) correlations, giving positive indication that the two sets represent precipitation similarly. CMAP data also possesses a strong correlation with CRU data, further bolstering confidence in the CRU dataset (Block and Rajagopalan